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Malaysia PM urges calm over fuel

Government says it can no longer afford large subsidies despite risk of protests.

05 Jun 2008 10:05 GMT

Abdullah said the government could no longer afford the soaring cost of subsidies [EPA]

The decision triggered massive queues on Wednesday night outside petrol stations in the final hours before the midnight deadline when the subsidies were dropped.

Around the world rising oil prices have triggered escalating protests.

Recent days have seen demonstrations by truck drivers in Europe and South America demanding a cut in taxes on fuel, while in Indonesia a 30 per cent hike in the price of fuel at the end of last month triggered mass street protests.

Rising costs

Speaking to reporters on Wednesday Abdullah called on Malaysians to accept the news calmly and avoid taking to the streets.

Street protests erupted in Indonesia after the government raised fuel prices on May 26 [EPA]

The prime minister is fighting for his political survival after his ruling coalition suffered unprecedented electoral losses in March, partly due to the rising cost of living.

"

God willing... I hope Malaysians will not demonstrate. It is better to spend time in the offices or factories rather than worsen the situation," Abdullah said.

He dismissed suggestions that the belt-tightening will send his popularity plummeting further

.

"We are trying our best. This is not an attempt to be popular. We cannot satisfy everybody," he said.

Along with the petrol price hike, the government has also introduced rises in electricity tariffs on a varying scale, depending on usage.

"God willing ... I hope Malaysians will not demonstrate.

Abdullah Ahmad Badawi, Malaysian PM

Commercial and industrial users are expected to see power bills go up by more than a quarter.

Subsidies have kept the price of fuel in Malaysia, a net exporter of oil, among the lowest in Southeast Asia, with only Myanmar having lower pump prices.

Subsidies are expected to cost Malaysia's treasury more than $14bn this year.

Sweeteners

Under the new measures, the pump price of petrol will rise to $0.87 a litre from $0.61 a litre to bring it closer to the global market price.

Diesel prices have risen to about $0.80 a litre, a 63 per cent increase.

Oil price fallout

Despite recent losses, oil prices have still gained almost a quarter since they smashed through $100 per barrel at the start of 2008

At $120 a barrel, the world's oil bill will account for eight per cent of global economic output, twice what it was in 2006

In early 2007 a barrel of oil cost $55, less than half its currernt price

The Paris-based International Energy Agency says it is worried that there may not be enough oil to meet global demandOPEC, the oil producer's cartel, has blamed speculators for soaring oil prices

The government said it would introduce some sweeteners to offset the tough economic measures, providing an annual cash rebate of $201 to owners of cars with an engine capacity of 2,000 cc or less.

Malaysia's economy, he said, was in reasonably good shape having benefited recently from strong global demand for commodities, especially palm oil.

"The situation is far better than during the Asian financial crisis 10 years ago, since Malaysia and other countries in the region are running current account surpluses and are no longer reliant on continuing foreign capital inflows," he said.

But Mavis Puthucheary, a Malaysian political observer, said the price rises could have far-reaching political implications.

"Malaysians are questioning why their country is following other counties in passing on price rises directly to consumers when it is a net exporter of oil," she said.

The emergence of a real opposition in Malaysia after the March elections means that voters will no longer allow state-owned oil and energy enterprises to conduct their business in secret, she said.

'Risk'

Malaysian petrol prices have jumped by 40 per cent overnight [AFP]

Gundi Cahyadi, an economist with Singapore-based economic think tank IDEAglobal Cahyadi, told the Associated Press the decision to scrap subsidies was a "great risk" to Abdullah.

"In the long-run, it's good but the immediate impact will be negative. You can expect a slowdown in the economy to below 5.5 per cent this year and probably into next year," he said.

Malaysia's virtual elimination of the subsidies is in line with similar steps taken by other governments reeling from record high global oil prices.

In addition to Indonesia's recent removal of fuel subsidies, Taiwan and Sri Lanka have also raised fuel prices, while India announced sharp hikes in energy prices on Wednesday.

Malaysia's government expects the restructuring of fuel and electricity prices will save the government $4.41 bn this year.

Malaysian shares opened sharply lower on Thursday with the benchmark Kuala Lumpur Composite Index falling 1.5 per cent in early trade.

Economists say the petrol price hike is expected to push the inflation rate to 4-5 per cent this year, up from 3 percent currently, weakening consumer spending and putting further strain on an already slowing economy.

But Wong Chin Tuat, a Kuala Lumpur-based political analyst, said the main problem with the government's reaction to the global rise of oil prices lies more with people's attitudes than economic facts and figures.

"The artificial cheapness of Malaysian-produced cars, caused by heavy tariffs on imported vehicles, and the poor public transport system means that many feel it is necessary to own a car," he said.